CL: Oil Companies Profits Too High - USM Forum -- Message Board

Silver Surfer · Status: Offline

CL: Oil Companies Profits Too High

LVN · Status: Offline

When we get upset about the high profits, we also need to review whether or not we hold stock in Exxon, Chevron, etc. Anybody with any kind of diverse portfolio, and anybody in PERS is benefitting somewhat from these profits. How much is a question one of our esteemed economists can tackle.

As for me, I'm really sorry about selling Exxon two years ago. It was a small amount, and it made a 34% profit, but if only I'd known . . . (which is why I don't play the stock market.)

-- Edited by LVN at 12:50, 2006-07-31

I just looked at Morningstar. Now I'm REALLY sorry!!

-- Edited by LVN at 12:54, 2006-07-31

Atheist · Status: Offline

Well, now we do have a topic where the expertise of those in the CoB will be informative. Maybe Cossack and others will explain what it means for "a corporation's profits to be too high". The goal of business is to make profits and Colleges of Business teach people how to accomplish this. So how can "profits be too high"? If they discuss this, maybe they will explain if and why "price gouging" is "wrong". I assume it may depend on the company's P.R. or public image, but otherwise is not against the goals of business.

Southern Belle · Status: Offline

It's aggravating to hear that the reason for gasoline prices increasing is due to the cost of a barrel of oil. Then you find out how much profit the oil companies are making.

LVN · Status: Offline

Southern Belle, I have the same question. I don't remember the little bit of economics I took well enough to understand the situation.
I used to co-own a retail business (a very small one.) If I paid $5 for my product and sold it to you for $10, I "made" $5. Out of that, I had to pay my business expenses. My actual profit might have been $1 or nothing. Ok, if my cost of goods goes up to $7.50, I can't afford to sell the product to you for less than $12.50. I'm still grossing $5 on the sale, and I still have expenses. However, if my other expenses (like fuel) also go up, I may have to charge you $15 to still carry $1 home in my purse.
That's the level of economics that ordinary people like me understand. What we don't understand is where the extra profits are coming from.

I'm with Atheist on this one -- Cobbers, show your stuff!!

Invictus · Status: Offline

Atheist wrote:

Well, now we do have a topic where the expertise of those in the CoB will be informative. Maybe Cossack and others will explain what it means for "a corporation's profits to be too high". The goal of business is to make profits and Colleges of Business teach people how to accomplish this. So how can "profits be too high"? If they discuss this, maybe they will explain if and why "price gouging" is "wrong". I assume it may depend on the company's P.R. or public image, but otherwise is not against the goals of business.

I, too, would welcome hearing an expert's opinion. It will be almost as interesting to see if one of the experts ventures an opinion.

Cossack · Status: Offline

Atheist,

Saying oil company's profits are too high is similar to saying that Liberal Arts Professors make too much money. Somewhere sometime you find someone that makes one of these statements. Both are merely personal judgments based on feelings. Another example is that I think Atheist is too smart and it puts me at a disadvantage. The oil issue is complicated by many factors. Some are under our control (USA) and some are not. Oil is a commodity in that it has a world price as does corn, rice, gold, etc. In the world market, politics together with world conflicts have resulted in a quantity produced that is less than demand at previous prices. In the US we have not built a new refinery in more than a decade. We have expanded some existing refineries, but that capacity is about exhausted. The lack of new refineries can be linked to environmental concerns both real and imaginary. Requiring ethlynol to be mixed in with gasoline has raised the price also since ethlynol takes about one barrel of oil in energy to produce the equivalent of approximately 1.3 barrels of oil energy. Bottom line, if you want to prevent drilling for oil in the Gulf of Mexico or Alaska, require ethlynol, build no new refineries and still drive cars, you are going to have increasing prices. In addition, when shortages occur, it shows up at the end user and that is us at the gas pump. There always is an increase in profits in the process. When the reverse occurs, there usually is an increase in losses.

Another theory is the oil companies are evil greedy corporations that prey on consumers. Critics claim that they can raise prices whenever they want. If that were true, oil companies would not have waited for a shortage, they would have raised them long ago.

History · Status: Offline

Everyone is assuming that the cost basis is the current world market price of oil. This is not so. Company A could be producing (extracting from the ground) oil at $15 a barrel (well in production since 1960). Any price over that is profit. Company B drills a new well at current costs and produces oil at $55 a barrel. If the current purchase price of oil is $70 dollars a barrel who is price gouging. Both companys are selling products at the competive rate, but company A has a huge profit margin.

A similar analogy could be made to a company bottling water from a well in the Arizona desert VS a company with a spring or river at their back door. Huge profit differentials if both products retail at the same price.

Cossack · Status: Offline

History,

Assume you live in Hattiesburg. Assume there was a large hurricane that destroyed houses on the Coast and there was an increased demand for houses. The house you bought two years ago for say $150,000 is now selling for $190,000. You get a position at another university accompanied by a nice raise. You will be leaving Hattiesburg and will sell your house. Since you only paid $150,000 for the house, by your logic you should sell it for $150,000 or maybe $160,000 so that you make a "reasonable profit". Convince me that you would not take the $190,000.

Atheist · Status: Offline

Cossack wrote:

Atheist, Saying oil company's profits are too high is similar to saying that Liberal Arts Professors make too much money. Somewhere sometime you find someone that makes one of these statements. Both are merely personal judgments based on feelings. Another example is that I think Atheist is too smart and it puts me at a disadvantage. ...

Cossack, I wasn't trying to trick you. I never had a business course in my life and consider myself ignorant in that area. My questions were more philosophical. To me it seems that from a business prospective there can't be anything called "price gouging".

One thing I never liked had to do with commissions. Example: Joe makes widgets and sells them 10% above cost to a wholesaler. Wholesaler A sells the widgets to retailer B and charges 10% of the price for his commission. Retailer B marks up the widgets 10% and sells to the public. Now the material to make the widgets increases so the price of the widgets goes up. However A and B do exactly the same work they did before as far as wholesaling and retailing widgets. If they continue with the 10% commission based on the new price, they make more even though they haven't improved what they were doing or increased their work. So the total price to the consumer increases much more than necessary to cover the new cost of the materials.

Cossack · Status: Offline

Atheist,

You do not need a business course; you have a pretty good grasp on commerce. Your comment about markup contains an assumption that may not be true (and usually is not in a competitive market). One can always raise prices, but that may not lead to increased revenue. Often it leads to lower revenue depending on the elasticity of demand for the product. Where many people make an error is looking only at one side of the market, either the supply or demand side. I am sure you have no problem with the concept that most people prefer more wealth to less wealth and act in their own interests rather than your interests. The only thing that stands between you and the seller of a product taking advantage of you is competition. One only needs to watch the number of business that fails to understand that customers are ruthless in their decisions. They do not care if I make enough in my business to feed my kids. They are primarily interested in satisfying their wants at a competitive price.

Southern Belle · Status: Offline

I do know the following - for a fact - because my husband delivers gasoline to the service stations in our area.

Whomever is ordering the weekly allocations of fuel is short ordering and has been for the past seven months in order to drive the price of gasoline up. The terminals in Collins receive their weekly allotments on Wednesday a midnight. It is not uncommon for the allotments to run out by Monday night or Tuesday morning. This forces the delivery companies to drive to and from one of the six terminals in Collins to try and find a load to deliver. This also drives the price of gasoline up because the drivers are paid each time they try to load and can not.

There is not shortage of gasoline in this area. One weekend this fall when you have time, drive to Collins and go West on Highway 84 for about two (2) miles. Turn around and head back towards Collins and look at the all of the silver and white gasoline tanks East of Collins. And they are steadily building more.

Someone needs to do something about the rising cost of fuel.

Cossack · Status: Offline

Southern Belle,

I give up. You are right, it is all a conspiracy. That is why all of the stations sell fuel at the same price. They would have raised the prices two years ago, but they were only in the conspiracy planning stage at that point.

Atheist · Status: Offline

Cossack wrote:

Atheist, You do not need a business course; you have a pretty good grasp on commerce. Your comment about markup contains an assumption that may not be true (and usually is not in a competitive market). One can always raise prices, but that may not lead to increased revenue. Often it leads to lower revenue depending on the elasticity of demand for the product. Where many people make an error is looking only at one side of the market, either the supply or demand side. I am sure you have no problem with the concept that most people prefer more wealth to less wealth and act in their own interests rather than your interests. The only thing that stands between you and the seller of a product taking advantage of you is competition. One only needs to watch the number of business that fails to understand that customers are ruthless in their decisions. They do not care if I make enough in my business to feed my kids. They are primarily interested in satisfying their wants at a competitive price.

Cossack, thanks for a clear explanation. If I understood you correctly the short answer would have been competition controls or constrains price gouging. But if there is a hurricane and only a few stations have gas (in other words less competition) there is no reason to not price gouge, except perhaps the customers will remember and business may fall off afterwards.

So it appears to me, the public should not complain about "price gouging". It is just people making business decisions in a free market economy. The public is just ignorant and doesn't understand free market capitalism.

Cossack · Status: Offline

Atheist,

There is precedent for government stepping in and rationing goods in emergencies. For instance, in a disaster, it may be prudent to try to intervene and get "adequate supplies" to all people for a short period. The longest period we had rationing was during WWII. Almost all goods required a ration coupon. Gasoline was a really big issue along with tires. Farmers got priority for gasoline and tires for farm equipment but I am sure that some of the "farm gas" went into cars. Farmers also could grow much of their own food. Many in small towns and villages grew gardens. We are not close to that situation with oil today.

Invictus · Status: Offline

Atheist wrote:

So it appears to me, the public should not complain about "price gouging". It is just people making business decisions in a free market economy. The public is just ignorant and doesn't understand free market capitalism.

Let me state up front that I do not believe that the oil companies are themselves price gouging but that they are in fact taking good business advantage of a series of "situations" (9-11, Iraq War, current heartburn in Lebanon, etc.). Their responsibility is to return the maximum dividends to their shareholders, many of whom do not realize they are shareholders (by virtue of various investment funds, retirement plans, etc.) & many of whom are howling about "price gouging" at this very moment.

But let's take another look at the situation. Suppose I am the proprietor of a country store that sells, among other things, vienna sausage, Coleman fuel (my usual day-to-day customer for this product also buys Sudafed in industrial quantities), Pabst Blue Ribbon Beer, ice, red worms, and gasoline. RC Colas & moon pies, too.

Now, I'm sitting behind the counter watching the Weather Channel on DishTV & I see that there is a big a$$ hurricane coming. So I immediately jack up the prices on my batteries, ice, vienna sausages, camp fuel & gasoline. Figuring I'm not going to be in business for a few days, I run the gasoline up to, say $4.59.9/gallon. Sounds like good business practice to me.

Is there any difference between a small country store owner running up prices after a hurricane & what the oil market does any time somebody passes gas (pun intended) in the Middle East? Last time I checked, the U.S. military was occupying one of the largest oil producing countries on the face of the planet. Shouldn't "simple economics" tell me that the price of gasoline ought to be dropping?

Again, this is just random musing. I choose to drive huge gas guzzling pickup trucks. I choose to set my thermostat on 52 degrees in the summer & 85 in the winter. I figure that American ingenuity never solves a problem until it gets critical. If the government were serious about reducing our dependence on foreign oil, it would be paying us all to drive Nissan Armadas, Escalades & Hummers, while subsidizing the price of gasoline so it never cost more than 27 cents a gallon. Because the only way we're going to wean ourselves off the petrified prehistoric plankton poop is to burn it all up!

-- Edited by Invictus at 15:55, 2006-07-31

-- Edited by Invictus at 15:56, 2006-07-31

-- Edited by Invictus at 15:58, 2006-07-31

Incredulous · Status: Offline

If you look around at all the giant SUV's and trucks hauling one driver and the high school student parking lots full of cars transporting one student, it is clear that gas must be cheap. As a percent of the average annual household income, gas is cheaper now than in the Fifties. If Americans cut their demand for gas by 10%, the price would fall like a rock.

Cossack · Status: Offline

Is there any difference between a small country store owner running up prices after a hurricane & what the oil market does any time somebody passes gas (pun intended) in the Middle East?

Not much difference except the small country store is local and the oil company is global. They own the product and can ask any price. Consumers can determine how to spend their money. The small store owner is less likely to act in the manner you suggest because of his reputational capital. His customers know him personally where as that is not the case with the oil company. However, I am not sure what your point is in the analogy.

History · Status: Offline

Cossack wrote:

History,

Assume you live in Hattiesburg. Assume there was a large hurricane that destroyed houses on the Coast and there was an increased demand for houses. The house you bought two years ago for say $150,000 is now selling for $190,000. You get a position at another university accompanied by a nice raise. You will be leaving Hattiesburg and will sell your house. Since you only paid $150,000 for the house, by your logic you should sell it for $150,000 or maybe $160,000 so that you make a "reasonable profit". Convince me that you would not take the $190,000.

I think you need to reread my post. Everything was competitive price. Not once was the word resonable utilized. My motto is buy low, sell high.

Alias · Status: Offline

How about it? Let's look at something that is really possible for us to have an impact on. We will never impact the global warning on this board, the energy crisis, the war in the Mideast, or the situation in Iraq.

We may be able to impact what happens to us locally at USM. So let's look at issues that we can impact.

(I do not want to restrict free speech for those of you that would like to discuss the change in the Bush adm. position on the morning after pill>)

Invictus · Status: Offline

Cossack wrote:

However, I am not sure what your point is in the analogy.

Cossack, you've read my posts on this board long enough to know that most of them don't have a point!

By assuming that the country store owner wouldn't waste "reputational capital," you sidestepped the analogy, really -- the analogy is that the Middle East gives oil companies the same opportunity to jack with prices as a hurricane gives the local gas station owner. We don't question whether anything that happens in the Middle East really has any impact on the free flow of oil, we just take that on authority. And consider who the "authorities" are: a president & vice president who are oil company execs & a secretary of state who has a supertanker named after her.

Sorry, I know that's purely coincidental & I shouldn't be injecting politics into what is so obviously non-political. Politics & economics have nothing to do with one another, right?

To my real point: All upstanding Americans should take it as their bounden duty to consume as much petroleum as possible as quickly as possible. At that point, a true crisis situation will arise & American ingenuity will be forced to manifest itself. Until then, well, we just have to content ourselves with vortex generators, cool air intake systems & whatever other wonderful inventions are available only through this TV ad...

Cossack · Status: Offline

I think you need to reread my post. Everything was competitive price. Not once was the word resonable utilized. My motto is buy low, sell high.

Spoken like a true capitalist.

Cossack · Status: Offline

Invictus wrote,

To my real point: All upstanding Americans should take it as their bounden duty to consume as much petroleum as possible as quickly as possible. At that point, a true crisis situation will arise & American ingenuity will be forced to manifest itself. Until then, well, we just have to content ourselves with vortex generators, cool air intake systems & whatever other wonderful inventions are available only through this TV ad...

I am doing my part. As an upstanding American and loyal Mississippian, I drive large pick up trucks and keep my houses cool. None the less, I expect that higher prices will bring forth much more oil (in places where they are allowed to drill) and the marvelous new inventions will not be forth coming. The environmentalists will be disappointed one more time. They may have to convert to another religion.

Patti · Status: Offline

I'm so out of my league here, but what the heck. This is what I remember from a few economics classes.

The cost of a gallon of gas is based on supply and demand. In the United States the demand is quite high as we are a very mobile nation, the supply of crude oil to refine to make gasoline/disel etc is lower due to the hurricanes and the war. Therefore the price goes up. Now, in contrast, I heard about 3 weeks ago that the cost of gas in Saudi Arabia had just gone up, to $.65 a gallon. I wish I could pay $.65 a gallon. Anyway, the supply there is pouring out their ears and the demand is lower.

Do I think that the major oil companies are "gouging" prices, you bet your sweet butt I do. I don't mind them making a profit, that is what they are in business for. However, 10 billion in profit????? Give me a break, pluhezze give me a break at the pump. I drive a little bitty car that gets, thankfully, 35 to 40 a gallon and I still have to fill up twice a week secondary to the distance I travel every day. I keep my thermostat turned down, I don't have AC in the house. I do what I can to conserve.

What is going to make the price come down is if we don't buy as much. Create an over supply. Now, I also realize that we all have to get to work, so my suggestion is this, buy what you need in gas per day and not fill it up. Also, try not to let the tank go below half as the best mileage is in the top half of the tank. If and that's a mighty big word, we all did that, gas prices would come down because the demand is reduced. I do agree that we need to break our dependency on oil, domestic or foreign and create new ways to power up. We also need to do what we can to slow down global warming, and our energy consumption is a cause of the overall environmental changes.

Oh, and LVN, I do have stock in the companies, but I still want to see the price come down. My quarterly check doesn't make up for what I spend weekly to earn that quarterly check.

My two cents worth.

-- Edited by Patti at 11:40, 2006-08-01

Cossack · Status: Offline

I drive a little bitty car that gets, thankfully, 35 to 40 a gallon and I still have to fill up twice a week secondary to the distance I travel every day. I keep my thermostat turned down, I don't have AC in the house. I do what I can to conserve.

Thank you for conserving. That allows bad people like me to use more fuel at a lower price. If more people would follow your example, I could use even more fuel at even lower prices. If you ponder on it, there may be some wisdom in my tongue in cheek post.

Advocate · Status: Offline

Many hydrocarbon transactions are executed on a percentage basis versus a flat fee. For example, the margins are based on 10% of the price versus a flat fee of say $.10. It depends on the particular contract. Therefore, a percentage based contract will earn the seller more money, the higher the price curve.

Additionally, energy companies are heavily involved in the futures market. If they hedged their bets properly, they can make huge profits, without ever having to actually delivery any product.

Curmudgeon · Status: Offline

Hi Patti,

You have some good observations, but I'd like to make one correction. Your best mileage comes when the tank is nearly empty because you are not hauling around 100-150 pounds of gas.

I'd also like to note that the oil company profits are high because of volume, not mark up. Their profit margin is something like 7%, which is below average for U.S. corporations. The two big non- U.S. oil companies (BP and Shell) have similar profits.The only way prices are going to go down is a substantial increase in supply or a reduction in demand. The latter possibility is somewhat limited because of economic growth in India and China. The former possibility is stymied by environmentalists' opposition to drilling and developing oil shale.

Patti · Status: Offline

Curmudgeon,

I have a question for you, and I'm asking in all sincerity. Why is it that the top half of my tank will last longer than the bottom half of my tank? It seems like I can drive for 2.5 days on the top half and only 1.5 on the bottom half. If I look at it that way, I'm getting better mileage on the top half of the tank, or at least it appears to be better.

Cossack, I realized your post was tongue and cheek, unfortuantely there are people in this country that do believe that way. And not just in Mississippi, we have them in New Mexico as well.

Curmudgeon · Status: Offline

Patti wrote:

Curmudgeon,

I have a question for you, and I'm asking in all sincerity. Why is it that the top half of my tank will last longer than the bottom half of my tank? It seems like I can drive for 2.5 days on the top half and only 1.5 on the bottom half. If I look at it that way, I'm getting better mileage on the top half of the tank, or at least it appears to be better.

Cossack, I realized your post was tongue and cheek, unfortuantely there are people in this country that do believe that way. And not just in Mississippi, we have them in New Mexico as well.

Patti,

On most cars a full tank registers above the full mark on the fuel gauge. You can go quite a ways until it is even with the full mark. Also, most gauges are not exactly proportional to fuel in the tank. We've all had gauges that went down pretty fast towards the final quarter of a tank.

If you want to check your top of the gauge mileage, fill the tank and record the odometer mileage. When you get to half a tank, fill the tank and see how much it takes. Divide that (gallons) into the miles traveled since the fill up. It's hard to do a similar test on the last half of the tank because it would be hard to stop at exactly half a tank when you refilled. You could compare the top half with a full tank for mileage. There would be little difference, but the full tank mileage should be a tad better because it includes the lighter lower half.

Car manufacturers have tried hard to make cars lighter to get better mileage. That is one reason for the mini spare tires in some cars. That's why it's a good idea not to carry lots of junk in your car all the time.

Another way to save gas is to keep your tires well inflated. A couple of pounds above the recommended pressure will save you money on gas and tires.

Patti · Status: Offline

I'll have to try checking the mileage that way. Hadn't ever considered that, thanks Curmudgeon. I did know about the tires and keeping them just slightly over inflated. You do have to be careful not to fill them to much over the recommended amount or they can explode on you, which is bad.